Pathways for Socially Conscious Investing by Private Foundations – New IRS Guidance for Program-Related Investments Now Final

PDF

Professionals

Practice Areas

Dianne Chipps Bailey
Robinson Bradshaw Publication
May 19, 2016

Program-Related Investments allow private foundations to make investments that generate both charitable impact and some financial return. On April 25, 2016, the IRS finalized long-awaited guidance that includes additional examples of permissible PRIs. These examples broaden the range of investment opportunities available to private foundations by illustrating how PRIs can further tax-exempt purposes and potentially turn a profit.

Program-Related Investments

PRIs provide private foundation managers and board members with comfort that socially conscious investments will not be considered jeopardizing investment subject to excise taxes under Section 4944(a) of the Internal Revenue Code.

PRIs are investments which are made to accomplish a charitable purpose, and they must meet the following requirements:

Typical examples of PRIs include low-interest or interest free loans to students, small businesses, and other businesses in low-income areas, as well as high-risk investment in low-income housing projects and other nonprofit organizations.

Because PRIs primarily serve a charitable purpose, they also count toward the annual mandatory minimum distribution requirement imposed on foundations under IRC Section 4942. So, PRIs may serve to further a foundation’s charitable goals while both generating a profit and contributing to its annual distribution requirement.

New Examples of Permissible PRIs

The new regulation clarifies and expands what types of investments qualify as PRIs. The examples included in the regulation will be valuable for foundations because they will allow foundations to rely on those examples, thereby relieving financial burdens and time delays associated with obtaining individual private letter rulings.

The new examples demonstrate that PRIs are not limited to investments involving low-income individuals or areas in the United States. Instead, PRIs may also include funding for activities in foreign countries or provide less traditional means of support for communities. Some of the noteworthy examples of qualifying PRIs are as follows:

On the same day the final regulations were adopted, the IRS added seven guiding principles to its website in order to help foundations determine whether an investment will qualify as a PRI. These principles directly track some of the new examples, but also suggest when an investment that does not fall squarely within one of the examples that would qualify as a PRI. These guiding principles are as follows:

The full text of the final regulations may be found on the Federal Register.

This article was prepared with the assistance of Megan Clemency, a rising 3L at the University of South Carolina School of Law.

Main Menu